The best way to explain a biweekly mortgage is with an example. Assume you need to borrow $166,791.61 and the current interest rate is 6%. The monthly payment would be exactly $1000 as can be seen from the CALCULATOR below. The 6%, 30 years and exactly $1000 per month was chosen on purpose. One of the features of the MORTGAGE2 PRO software is that one can specify any three and calculate the remaining item. In this example we let the principal of $166,791.61 be calculated so that the blended monthly payment would be exactly $1000. Canadian borrowers would immediately divide this $1000/2 to arrive at the accelerated biweekly payment of $500.
Each time new information is entered into the CALCULATOR, a new schedule based upon the new information is calculated and displayed in the SPREADSHEET.
Now let us calculate the biweekly payment for the same mortgage. Changing the Payments per year to 26, the days per year to 365 and then recalculating the Payment in the CALCULATOR, the biweekly payment would be calculated as $460.11 as shown below.
Comparing the two Calculator Interest figures, $193,208.36 and $192,091.26 the savings achieved by going the biweekly route are $1,117.10 which is significant but not earth shattering. The regular biweekly payment of $460.11 is the number that any financial calculator would show, based upon 30 years of payments (780 biweekly payments in 30 years), providing you input the correct interest rate per period based upon monthly compounding. Now you understand why the the odd amount of principal was chosen (166,791.61). That was to make the monthly payments exactly $1000. $1000 per month is $12,000 per year. The yearly cash flow to the Bank is $12,000.
In 1984 a major Canadian lender introduced the weekly and biweekly payment mortgage plans. They also introduced two arbitrary payment names. They said, what if we arbitrarily allowed a borrower to pay back a yearly cash flow of 13 monthly payments ($13,000) but do so in a biweekly fashion.
$13 x 1000 / 26 = $500
This lender called the $500 biweekly payment the accelerated biweekly payment.
They also said what if we arbitrarily allow a borrower to pay the regular yearly cash flow of 12 monthly payments ($12,000) in a biweekly fashion.
$12,000/26 = $461.54
This lender called the $461.54 biweekly payment the non accelerated biweekly payment. We now have two arbitrary biweekly payments along with the regular biweekly payment summarized below.
The regular biweekly payment ($460.11) requires the full 30 years (780 payments) to amortize (pay off) the loan and saves you $1,117.12 compared to the monthly plan, because you are paying back principal more frequently. The non accelerated biweekly payment ($461.54) requires 29.74 years to amortize (pay off) the loan and saves you $3,091.17 compared to the monthly plan. The accelerated biweekly payment ($500) requires 24.38 years to amortize (pay off) the loan and saves you $43,033.13 compared to the monthly plan.
It is interesting to note that the non accelerated payment saves you $3,091.17 over the 29.74 years and this is free money. It is the same yearly cash flow as the regular monthly payment plan but paid back biweekly. How often do you get free money from a Lender? The accelerated biweekly payment saves you the most because you are paying back more frequently and a larger amount, therefore the amortization period is significantly reduced to just over 24 years. Of course you can tell your lender to take even bigger biweekly payments and the savings are even more dramatic. When the interest rates are in the 12% range the savings appear to be unbelievable, as can be seen below!
Look at the free money now,... $28,281.40 ... thats enough to buy a new car at the end of 28.63 years. Look at the incredible savings now, due to accelerated biweekly payments,.. $199,830.35 thats more than the original mortgage.
HOW TO CALCULATE THE ACCELERATED BIWEEKLY PAYMENT
Divide the regular monthly payment ($1000) by two to arrive at the accelerated biweekly payment of $500 (because 13 x 1000 / 26 = 1000 / 2)
Make sure the payments per year are set on 26. The days per year should be 365 (very few North American lenders use the old 360 method for weekly or biweekly payments). Type in the Principal, Annual Interest Rate and the Payment of $500 and the amortization period will automatically be calculated as 24.382 years.
If you are going to do a biweekly schedule calculate the monthly payment first based upon the full amortization period in order to arrive at the normal monthly payment. Then decide if you are doing an accelerated payment (divide by 2.0) or a non accelerated payment (divide by 2.166666) or type in whatever biweekly payment you want and recalculate the Amortization Period.
For Americans Only
If your lender offers you a biweekly payment mortgage, before you sign any contract, ask them for an amortization schedule and compare it to the two schedules below. If it doesn't agree with either one, .... ask them why??? Do not let them convince you that a blended payment biweekly schedule is complicated rocket science!!! I actually heard an explanation from one lender that told a customer that some months have three biweekly payments in them so a schedule is difficult to produce! This is complete nonsense! A blended payment biweekly schedule expects a payment every 14 days, plain and simple. If it happens that three biweekly payments span a period of one month, so what! It is a biweekly payment mortgage and the month now has nothing to do with it. If you are given this explanation then beware as you are not getting a true biweekly payment mortgage.
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